* Italian borrowing costs rise as Monti says quitting early * Move casts uncertainty over country's political future * Market positioning increases the risk of sell-off * Spanish yields also rise, Bunds benefit By Ana Nicolaci da Costa LONDON, Dec 10 (Reuters) - Italian government bond yields jumped on Monday a decision by Prime Minister Mario Monti to step down early left the country's political future unclear, hurting riskier euro zone debt. Monti said on Saturday he would resign once the 2013 budget was approved, raising questions over who will take the reins of the euro zone's third largest economy at a time when it remains a focus of the region's three-year debt crisis. His announcement, potentially bringing forward an election due early next year, came after former prime minister Silvio Berlusconi's party withdrew its support for the government and he said he would run to become premier for a fifth time. "Berlusconi's actions have created a degree of uncertainty in the market with regards to the Italian political scene," Justin Knight, European rates strategist at UBS said. "Part of the problem here is that investors outside of Italy are not positioned very well for this," he said. "They're quite close to neutral versus benchmarks, having previously been underweight of both Spain and Italy. Some investors are now overweight, and we have seen more investors going overweight over the last few weeks." Top-ranking German bonds benefited. Bund futures were 22 ticks higher at 145.94, pushing 10-year yields 1.8 basis points lower to 1.28 percent. Ten-year Italian borrowing costs, meanwhile, jumped 36 bps to 4.90 percent, while the Spanish equivalent was 18 bps higher at 5.7 percent. Spanish Economy Minister Luis de Guindos said on Monday his country, which continued to study the need for outside financial aid, would suffer contagion from Italy's political turmoil. Analysts said uncertainty regarding the make-up of Italy's next government and its commitment to austerity was behind the rise in yields rather than the prospect of Berlusconi's return to power, given opinion polls give him little chance of success. Five-year credit default swaps (CDS) on Italian government debt rose 33 bps to 288 bps, according to data monitor Markit. This means it costs $288,000 annually to buy $10 million of protection against an Italian default using a five-year CDS contract. "Any question over their dedication to austerity is not going to be good for BTPs (Italian debt) especially given the fact that everyone is long," said one trader in reference to the recent bout of buying based on the prospect of European Central Bank support.HIGHER BORROWING COSTS Alessandro Giansanti, senior rate strategist at ING, said Monti's move could see 10-year Italian yields rise to 5.25 percent over the next two weeks as it will complicate the passage through parliament of measures aimed at keeping the country's debt in check. The ECB's promise to buy bonds of countries that ask for financial help has seen Italian borrowing costs fall some 200 basis points since July's high of 6.7 percent - a level viewed as unsustainable for long-term funding. "The main risk is that the measures that the current government will need to pass come (under threat)," Giansanti said. The sell-off could be accentuated by the extent of the recent bond rally and as liquidity thins into the end of the year, he added. Against this backdrop, Italian debt auctions this week may prove more challenging, even though decent demand was still expected. Rome plans to sell 6.5 billion euros of one-year bills on Wednesday and will offer three-year bonds on Thursday in the last sales to be settled in 2012. "I don't think the market is really going to take Italy to task, unless they struggle with the BTP auction this week, which I don't think they will," Marc Ostwald, strategist at Monument Securities said. "I would say they will make a big concession for them." Spain's Treasury will also issue bonds - due 2015, 2017 and 2040 - on Thursday, in its last bond auction of this year.